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tv   Capitol Hill Hearings  CSPAN  June 14, 2012 6:00am-7:00am EDT

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we give them reports. they get some reports. we give them what they want. in this particular case, since we were misinformed, we probably misinform the them. the mistake we made we passed on to them but the second we found out, the first people we got up on what was their regulators to explain a of a problem and would describe it to them and they have been deeply engaged since then. >> that was april 6. april 13, earnings call, or they told about the trades prior to their earnings call? >> i don't know. they get some of our reports but we probably -- because we were misinformed, we probably continued to misinform them. once we found out, among the first people we call for our board and regulators. probably not even in that order. >> the issue is partly your side and the occ side. do you know if occ enquired about trades at these five
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regulators back and a york, did they inquire about the trades prior to the earnings call? >> i don't know. >> can you tell us at what point did occ take steps to challenge the trades? >> i think the second they understood the significance of the trades, they started to challenge every day. and they continue to appear in >> is 5 regulators in london enough? >>but i don't know the answer but in this day and age, they get all the reports from london and they do it by telepresence. they serve global clients. they do with a lot of middle- market companies and innovate and run call centers. the process are credit cards
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which we ship around the country. those employees are not his doing ohio-based business than i understand and appreciate that. since 2007, your chief investment office has ground. occ says that your activities were not historically considered to be high-risk but they go on to say that a similar level of activity or situation, large hedges that are a liquid and very complex, is not present in other national banks for other large banks to not conduct -- credit derivatives in the size and complexity that jpmorgan has. should occ have been more focused on trades of synthetic derivatives? >> i think we should have. if they stopped others from having this problem, i would have been happy with that. >> if your bank did not have $2.30 trillion in assets, would
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your c i o [unintelligible] need to be to the $370 billion? >> most of that represents deposits. we bought wamu and we had more cash. we have like 1000 small bankers wamu so we have become small- business lenders. other than this one thing, we invest assets conservatively. >> center corker made a statement in moment ago and offered the question for the observation that raised the possibility that this hit -- jpmorgan chase may be too complex to manage which begs the question, is it too complex and too large to regulate? in 13 years, jpmorgan has quadrupled in size to $2.30 trillion today.
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there are six american banks at $800 billion and above. over the last five years, you're grown by $400 billion. this case demonstrates that in a practical matter, neither you or the occ could monitor what was happening in a chief investment officer. if it were standing alone, it would be the eighth largest bank and united states. we have a $3 trillion bank and it appears from listening to you and your comments from watching what has happened in talking to the regulators and saying the occ response, it appears executives and regulators cannot understand what is happening in all these offices at once. it demonstrates to may to big to fail are too big to manage and to big to regulate. i yield ck. >> johans.
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>> let me say thank you for being here today. i have listened to the various questions about the trade. i think this summarize everything you have acknowledged. it was definitely a dumb move. all losses on for some and you have apologized for that and what is true that. i want to ask you about some things may be at a 25,000 foot level. how many regulators do you have on site in your organization from some federal entity? >> i believe there are hundreds. and it is across multiple regulators. >> when something like this pops up, are the channels clear
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anymore as to who you deal with and who is regulating what and who you need to be paying attention to? how you deal with that? >> we're always going to treat the regulator the way they deserve to be treated. whatever the system as we have to deal with it. we have people who are aside specifically to deal with regulators, the fdic, and others. we do with all of them. on this particular issue, the first three are always engage them how much of a regulatory costs increased as a result of dodd-frank, the volcker rule, whatever it is? >> i have estimated roughly -- we're talking about $1 billion per year across systems, technology, compliance, it cuts across everything, maybe 8000 programs. the rules, the brussels as well as the u.s. and u.k.
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we will do all those things, meet all the requirements but it will be a little costly. >> one of the things that i have maintained in many hearings as we have examined the dodd- frank before and after its passage is that there's just a point at which economically, better business to do business elsewhere than the united states. to run that risk with dodd- frank that literally we have made life so complicated, so hard to navigate through that you have enterprises who decide that i will just go to singapore were ever to do business? >> we will be find ourselves. we will be able to navigate all that. i talked a lot of business people and many people say is easier to be overseas. several companies have moved overseas recently. >> my concern is that it does not stop there.
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what i saw about dodd-frank, we started out with a laudable purpose. let's figure out what happened in 2007 and 2008 and had we fix it and co-ops for showing up in my office and asking me what i'm doing. how did a farmers' co-op have to do with anything that happened in those years? i have not verified this because somebody just told me this last night. maybe you are aware of it. somebody who worked with his banking committee mentioned last night at an event i was at that there had not been a single bank charter last year in the united states act and it had been 78 years since that had happened. do you have any information on that? >> i was aware of that. >> -- i was on aware of that. unaware. >> you've got a lot of firepower and you are just huge.
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we will find a way to navigate what has happened here. you're not located in my state and i doubt that you're probably considering -- probably not located in my state although it is a great place to do business. >> maybe we will be there one day. >> what i suspect is happening is that our medium to small banks are now trying to navigate through this very complex legislation. these are banks for maybe they employed a dozen people or two dozen people and they're just going to give up. what is your impression of that? >> we back with a lot of smaller banks and some of these things are harder on smaller banks on some of the larger banks, unfortunately. >> senator chester.
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i appreciate you hold in this important hearing. >> this gives us a better chance to understand why j.p. morgan committed egregious mistakes from a poorly constructed hedging strategy. of like to focus on role leading up to the end of global bankruptcy. >> jpmorgan had significant signs about the health of the firm, mf global, and its compliance with regulations guiding the protection of customer funds for your firm was intensely focused on whether collateral proposed by mf global was paid with customer segregated funds. your firm took steps to protect itself and its exposure to mf global, placing mf global on debit alert, lamenting the
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transactions the firm could take an increasing collateral requirements. over 100 of my constituents have their accounts are rated. on may 18, j.p. morgan returned $168 million in cash. it was excess collateral that your firm held at the time of
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the end of global liquidation seven months ago. why did taker from seven months to return these funds? >> the second they had problems, we went to the trustees in the courts and told them what we had and we did not have and we have been waiting for them to finish their work before release anything. we have cooperated every step of the way with the authorities. >> there was money released initially when and of global started down this path by your firm. there was $168 million that was held seven months. why? >> i think we were waiting for the guidance and a trustee.
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>> you had ongoing negotiations with mr. giddons. according to the investigation, your firm took steps to mitigate its exposure to a map global, limiting the transactions the firm could take. despite repeated attempts by a very senior risk management officials at your firm, to determine whether collateral for the mf global $175 billion transfer was in compliance with the rules regarding segregated funds, mf global did not sign a confirmatory letter that you're from demanded.
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without this confirmation, and your suspicions, jpmorgan chase ultimately transferred the funds and except of the collateral. -- and accepted the collateral. were you aware of the effort by senior risk management to see compliance confirmation from mf global? >> not the time, i wasn't. >> why did jpmorgan chase relent and allow the transfer? >> i think the transfer had been made and we were doing a follow-up letter which was not required. we were asking them to make sure they had done the right things, you are saying that even though you had placed some of global on debit alert and you ltd. -- you increase the collateral requirements, when they ask you to transfer the money, there was no conversation about whether this money was segregated funds?
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you just transferred head? >> they transferred it to us. >> it was within your transport. >> it was covered from the prior day. >> the real question here -- you guys were concerned about mf global and you know the industry better than anybody sitting up here. you knew what was going down with mf global because you put them on the alert. they have requested money to be pulled out of your facility to be sent to another facility. there was some question by senior management officials in your firm whether this was segregated money, money that farmers were hedging with and, in your words, hedging was to protect a company from bad outcomes. can you tell me if jpmorgan had any obligation for those funds? >> they gave oral confirmation and then went bankrupt. >> you got oral confirmation on
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this. is that general operating procedure? >> the general operating procedure is not to ask at all. their response will to make sure their customer funds -- we were using excessive precaution. >> yoon one company is going belly up? >> yes, and we also tried to help them at that. . -- point in time. >> my concern is because there were a lot of farmers that hedged to protect themselves from bad outcomes and if this money was transferred and that was segregated money, there's a real problem there. i'm just looking out for my folks. >> i hope they will get all their money back and i still hope -- i still feel they will. >> i hope there are individuals held responsible and thank you for your flexibility on the time. >> senator moran. >> thank you for voluntarily
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being here. he responded to someone's question earlier describing the things that are good about smaller institutions and things that create problems in larger institutions. i don't have that list in my memory but hubris stands out, arrogance. how do you manage a company the size of jpmorgan and overcome the -- bet list -- and overcome that list that are natural occurrences. >> they can occur in smaller organizations, too. >> you're not talking about the senate, surely, and definitely not, not now. [laughter] i think all companies want to have great employees, always analyze things come always challenge yourself and learn from your mistakes and people are honest all the time and do share reports. there are ways you can avoid the negative of being a big company. hopefully, we foster the right
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kind of culture at jpmorgan. we believe we are in business to serve clients, that is job number one and we do it every day around the world into thousand communities around the world and we hope our people believe that and it is in their hearts to do the right thing every day. we as people to treat your friends and your parents. if you see a problem, you should raise your hand and call the right people. we have constantly try to improve our products and services. we tried to a knowledge legitimate complaints. we tried to fix them. >> how you manage jpmorgan really is the business of your board of directors, your shareholders but it does have consequences to those of us to believe in a free-market system, its value and merits. i hope -- i have the sense that that is a responsibility to understand that protecting this american free enterprise system, how jpmorgan and every
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other company large or small conduct themselves and what the labor day exhibit really matters in our ability to be an advocate for a free market system that creates jobs and economic opportunity and allows americans to pursue the american dream. anything i am missing here? >> i could not agree more. >> our ranking member, senator shelby shall become a talks often about sufficient capital as the greatest deterrent toward too big to fail and i agree with that. the other component that is involved i think in trying to make certain that taxpayers are not responsible for the demise living will. would you describe to me what process jpmorgan has gone through to develop that living well and how transparent as and what role the regulators play? if we saw the living will
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develop for jpmorgan, what satisfaction would we have that your company could be dissolved without a call upon taxpayer dollars? >> we have to get rid of anything that looks that too big to fail. we have to allow our big institutions to fail. we should not prop them up. we have to allow them to fail. you want to be sure they can fail and not damage the american economy and public. you want to be in a position where big bank and be allowed to fail. i would not call it resolution. i would call a bankruptcy. i would call a bankruptcy for big, dumb banks. i would wipe out the equity and fire the board and with every day recover would be in a normal bankruptcy. resolution authority starts to put the structure in place but the living will means giving the information regularly that
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they now had to do it. the fdic has taken down a lot of large banks including wamu, continental illinois, it is more complex now. the need to know what happens to this legal entity and that legal entity and what will you do with this thing happens. we have filed recently an analysis and report on how they would go about dismantling jpmorgan that did not cost the taxpayer. if the fdic ever puts money -- i dismantled after that and that name to be buried in disgrace. justice here. if that ever cost the fdic money, it should be charged back to the other big banks. today, it is a government program but it is paid for 100% by jpmorgan. we have paid them $5 billion so
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we are paying the fdic. it puts an incentive on the other big banks to collaborate to make sure rules are in place we don't jeopardize each other. >> if jpmorgan became a big dump bank and was in serious to financial difficulty, is your sense -- we don't want to use the word dissolve -- that the circumstance would be concluded with jpmorgan's demise at no cost the taxpayer? >> yes. >> thank you. >> that's the object of. >> centre call. >> -- senator kohl. >> understand that jpmorgan is lending more money to businesses and i appreciate that. however, it appears your bank lending is not keeping pace with the deposits your taking in. last year, jpmorgan reported
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that it had $1.10 trillion in deposits. this is more deposits than any other bank in the united states. the other big banks reported loans to deposit ratios that are 10-20% higher than your bank. it seems like lending to american businesses would be less risky than what was being done on the london office. is your loan to deposit ratio lower than your peer banks because you are perhaps prioritizing these risky trading activities over lending? to we hope you're going focus more on lending in the american market? >> we are making all the good loans weekend in all due haste. we are a global money center bank and that means we have deposits from governments around the world, from sovereign entities, large corporations that could be taken out tomorrow so we have to keep liquidity.
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we have several hundred billion dollars right now invested in central banks around the world. we are a bank for people who say we need huge liquidity fund's. >> the records indicate that your reported loan to deposit ratios at your other big banks, there reported ratios are a 10- 20 percent sign higher than yours. that would seem to not square with your statements that you want to lend but you don't have the customers to lend to. >> middle-market loans are up like 12% on average in the last eight quarters. small business loans are up 52%. corporations have many choices so that changes all the time. our mortgages last year was $40 billion. that is a huge number. we're not like all other banks.
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we need to keep a lot of cash around to deal with immediate cash demands of the people who bank with us. you're talking about the biggest company in the world who can move $5 billion or $10 billion in one day. >> the biggest banks with whom you are competing are generally described in the same way you describe your is. their loan to deposit ratios are higher than yours. different reasons. >> senate offices like ours here from constituents trying to get a modification on home loans to stave off foreclosures. they typically come to us because they are having trouble getting through to their lender. sadly, it is often, for our constituents to say that the bank lost their paperwork. in the four years since the crisis began, we still hear about these mixups.
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as a constituent who had a long with jpmorgan noted recently, i don't want to lose my house because they cannot keep their paperwork straight. why have banks been unable to serve out -- sort out the paperwork problems? >> i would agree the constituent should not lose a home because we failed in paperwork. send it to me and i will fall on right away. we have hired 20,000 people to deal with the fuld modifications and we have offered modifications of 1.2 million loans. we have offered modifications and we're doing it faster today and have put in more system to deal with it. we're not -- we were not very good when the problems started. we were overwhelmed. >> the cio office carries out complicated transactions. you imply some of the part as bridging smartest people in industry to work for you.
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-- you employs some of the smartest people in the industry to work for you. you have such complicated business on one hand on the other hand, you and other banks of your size cannot seem to do something as simple as written out your own paper work promptly. does the plight of the american home are -- homeowner have the same priority that you have to your c.i.o. office? >> yes, it should. we should do it properly and for anyone in this room who has issues that we're not following up, send it to me or our staff and we will take care of it right away. >> thank you. >> thank you. this has been very instructive to the public and members of the committee. i think you told senators shelby that the purpose of hedging is to earn a lot of
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revenue in the event of a crisis and i think you said hedging works to an extent in 2008 for your company. can you quantify the extent to which hedging worked in 2008? >> i don't recall the 2000 a year but the credit portfolio earned several billion dollars of income in the three or four years before. we could follow up and give you more specific details. >> i think that is probably what we need to do. i think you also said you did not know what the volcker rule is. if you don't, we don't either. i think you know how it is being drafted. as as currently drafted, how would that have affected the c.i.o. ability to do that hedging in 2008 and prevent several billion dollars of losses? >> i think you are allowed to
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portfolio edge under the volcker rule. i don't know what the current rule would do. we should step back for a second. the really important part is not portfolio hedging. it is the ability to actively make markets and raise capital for companies and clients and investors. we have the widest, best, deepest, and most transparent capital market in the world. the capital markets of america are part of the great american economic business engine. we have the best in the world. we had some problems. we should recognize that we are the best. how does it benefit you all that we have the best in capital markets? the cost of buying or selling its share of stock is 1/10 of what was one year ago. the cost of doing a corporate bond is less a critic cost of doing a swap is 1/10 of what is it was one year ago. investors to buy or sell securities does a that a cheaper price. that means that the people they
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invest for doing things cheaper. that is a good thing for them. it also allows corporations to issue debt cheaper and quicker so a large corporation wants to issue $5 billion, it can be done in a day around the world. they get a better deal at a cheaper price. the liquidity and the market keeps the spread low and benefits both investors and issuers. the secondary markets and the primary markets are directly related. if the costs are low here, if consumers are educated about companies and we spend $1 billion per year educating people, these issuers can do it. the investor is not fidelity. is the person it fidelity is investing four. those are retirees, mothers, veterans, state and municipal plans. it is a good thing. the volcker rule, when it came out, has some of the pieces to it, we have been urging people not to think of it as binary. think of it as a traffic law.
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some cars should go 65 and some should not. some streets should be different. some lights should be bright and things should be done right. we have the widest, deepest, best capital markets in the world. it would be a shame to shed that out of anger or something like that. all these securities are different. we cannot turn over much some markets very quickly. if we need to buy securities in anticipation of extra demand, we need to buy securities that you can sell right now. your decline and we make money every time that happens, not a lot. go through the detail to make sure we get the volcker rule right-of-way one of the best capital markets and the world. i don't want to sit here in 20 years trying to figure out why it is elsewhere. >> thank you. i only have five minutes. [laughter]
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>> i'm sorry. i was waiting to say it. >> a thank you told senator corker the financial system is safer today and you cannot say that dodd-frank has held the ball. -- has helped at all. you went on to say that the regulation regime is not necessarily stronger today but it is more complex. you don't really know what the jurisdiction is. have i paraphrase your testimony correctly? >> some of the things in dodd- frank made it safer but the most important thing is higher capital, higher liquidity, better risk-management and the things that caused the problems do not exist anymore. that was not because of regulations. that was because of markets. >> you said something else that called me by surprise. that was the testimony that nobody got all the parties in a
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room with people in your industry, democrats or republicans, and talked about what was needed and what really needed to be fixed. did i hear you correctly? >> yes. >> did you volunteer to be part of that conversation? >> yes, we will do whatever you want and get our partners down here and go through in detail. we have spoken to lots of people. our folks to a lot of analysis and research. i think the real collaboration should have been taken place. i know anchor led to the the legislation but we would have been better had there been more collaboration. we can all shake hands with a new system in place and move forward. >> let me ask this question about the living will -- are you telling this committee that jpmorgan chase has a living will that has been approved by
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government regulators? >> it has been drafted and circulated and given to the regulators. they will be responding to this. i think it will go through several generations to get it right and i have to coordinate with foreign entity so will take time. >> thank you very much. in 20008, 2009, your company benefit from half a trillion dollars in low-cost federal loans, $25 billion in tarp funds, untold billions indirectly through the bail out of a.i.g. that helps address your massive exposure in repurchase agreements and derivatives. with all that in mind, wouldn't jpmorgan have gone down without the massive federal intervention both directly and indirectly in 2000 a and 2009. >> i think you're misinformed. that is leading to a lot of
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problems we have today. jpmorgan to tarp because we were asked to by the secretary treasury of the united states with the fdic in the room and the new york fed head tim geithner. we did not need the money. we were asked to because we were told, and correctly so, that of the nine banks there t takearp we can stop the system from going down. we did not bar from the federal reserve except when they asked us to. they said please use these facilities because it makes it easier. we are not spelled out by a.i.g.. we would have -- we would have a direct loss of $2 billion if a.i.g. went down and we would of been ok. >> many analysts said the a.i.g. bailout benefited you personally? >> they are absolutely wrong. >> i'm asking you to respond to questions. i also may have five minutes.
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let's agree to disagree. i think that many analysts have reached the conclusion that if you applied the old testament justice in 2008, jpmorgan would have gone down and you would of been out of a job. it goes to the enormous frustration of how many companies in the history of the planet have been offered half a trillion dollars in low-interest loans, not many. the basic concept behind but volcker firewall is that banks are in the lending business, not in the hedge fund business. do you share the basic philosophical orientation? >> we're not in a hedge fund business. >> i wanted to turn to the report of a few days ago.
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it reports that jamie dimon created the c i o, had their report directly and invested in government-backed securities to see profit on higher yielding assets such as credit derivatives. as according to half a dozen former executives of the company. it sounds like doing that with government-backed funds. >> the average rates isaa + the average maturity has three years, not 20 or 30. the average yield is 2.7%. those characteristics are of a very conservative portfolio. one of the other senators mentioned -- in addition, we have $150 billion set in central banks around the world. we don't make enough loans but loans to deposits are considered conservative, not aggressive. in the other area, yes, there is a legitimate complaint. >> david olson, former head of credit-rating said we want to ramp up the ability to wrap up profits for the firm. you would fundamentally
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disagree that what that was your instruction? >> i don't believe everything i read. i hope you don't either. i don't know what he means. >> the general picture that emerges is one in which the assets in c.i.o. were expanded fivefold over a four-year period. numerous executives of your from testify that at your personal direction, they were to invest in higher yielding assets rather than traditional government-backed securities. when those bets go bad, instead of taking responsibility, you. >> -- blame on the unit you set up. should you take personal responsibility since they were following your gain plan? >> the $350 billion portfolio is conservative and has an on realized gain of seven or $8 billion. this and that credit is why i am here. we made a mistake and i'm
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absolutely responsible and the box stalls with me. >> -- and the buck stops with me. >> the volcker rule says the funds between the lines should be invested in treasurys or government-backed instruments. taking those same deposits and putting them into high risk investments and credit derivatives is a fundamentally different strategy than laid out in the volcker rule. i am puzzled that you are not sure whether the vision laid out by the volker fire wall between hedge funds and banking would have prevented the type of operation set up in london. >> $350 billion is conservatively done and is allowed under the volcker rule. i have already confessed to the sense of the synthetic credit side. we will not do something like that again. it does not stop us from doing the good stuff. we're doing what a bank is supposed to do and we do it every single day.
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>> from what you are saying, your gain plan going forward is when you have surplus deposits and your managing vamp, you will return to the strategy of relatively safe and liquid investments rather than operating in the derivatives world. >> the current strategy is relatively liquid. >> thank you very much. >> i understand we have two votes beginning adnan. -- beginning and known. at -- noon. >> thanks very much for being here and for your testimony. you made the statement that the answer is not more regulation, it is smarter and stronger regulation. i absolutely strongly agree with that. unfortunately, i think a lot of dodd-frank has been more regulation which in many cases has been more confusing.
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another way i might put it is i think we need more systemic changes, less micromanagement and a big systemic changes that are under discussion that impact what we're talking about our capital requirements and the volcker rule. i want to explore that with you. i understood when you criticized previously basel iii that part of the criticism was higher capital requirements for bigger banks. is that correct? >> it was more about the details behind it. when we went for the crisis, we had 7% a b oneasel capital. we bought bear stearns and wamu and the capital ratios never went down. today we have 10% and all the
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new rules would put as a 14%. there is an issue about how much capital is enough. we never argue about having more capital. the calculation should be done fairly and properly. some of them make it harder to have proper capital and i have complaints about how some of the charges are being done. >> do you think very big banks should have higher capital requirements? >> i would be fine with that. >> and compared to the 7% floor for a bank as big as yours, where do you think that should be? >> they should have said you can have 8% and it does not create confusion. people don't know what the real requirement is yes. >> your suggesting a percent sign. >> if it were me, i would say just 8 and if the regulators
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have the wrong number in a couple of years, they can change it. i was worried that we would create capital confusion. if people don't know where the cat will is, it has to be evaluated. it is not conducive to lending. it is conducive to people pretending their capital and reducing their balance sheet. >> there are other folks like switzerland who is requiring 90% -- 19% of their two large banks. you think that as clearly>> yes. 19% is not comparable to my 10%. they have a different problem. those banks dwarf the size of those countries. >> is there a true real version of the volcker rule you think makes sense and should be
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implemented? >> i think we will struggle to get it right. it was written so vaguely it will be hard for the regulators to come up with rules that make it easy for market makers and easy for regulators. >> i'm not asking about the current process. if we start with a blank sheet of paper, would you support a properly designed but true version of the volcker rule? sought no such rule? >> i would say as unnecessary. >> you think is unnecessary. >> maybe there are pieces -- if you said the intent is not to take some interest on the trading books, i think there are ways to do that. i think it is too confusing to rewrite the rules than a water the systemic, a simple regulation ways to do that? >> proper capital, proper
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liquidity, make sure that most of it is appropriate for the product, make sure inventories turned over, proper risk measures and proper risk controls. >> again, i strongly endorse open -- the overall concept of not more regulation but smarter and stronger regulation. it is sort of like the dodd- frank reaction to the crisis. i don't think the solution is we will have really smart regulators this time instead of just simply smart regulators before. we will have more regulators. quite frankly, my concern about some of your testimony about the jpmorgan chase reaction is that i sort of fear that town in your reaction that we will be smarter about this time and get it right this time and we will really bear down the. time on wondering if there should not be a more systemic change within the company to avoid this.
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yes. >> are there any more truly systemic changes that have occurred in the light of this? >> in our company? >> yes. >> we will make sure that we don't have the same kind of risk. >> have there been more broad systemic changes within the company directly in reaction to this incident? >>but just take their review of every single thing thatwe think it is isolated. >> thank you. >> they will hold up of the vote for a few minutes. senator hagen. >> thank you for holding this hearing. you mentioned in your company encourages people to raise their hands when they see something go wrong and i
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appreciate you doing that today. a lot to talk about the actual trades. i would like to get some the. trades we saw press reports about the whale and investors talk about strange movements in the swap indexes. how big was the position. how could be so large without coming to the attention of management, of regulators, and ultimately shareholders? >> i will have to decline to comment on some of that because my first job is to protect my company and to manage it, disclosing certain things could hurt my shareholder and i don't want to be put in that position. some of the information in the public was accurate and some was not. trades. it was not one single thing. we're managing that risk down. i can go for all the reasons we
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should have got better earlier. that is -- it should never have gone to this size. process in jeopardy. let me to talk about var. jpmorgan calculated how the chief investment office could lose money in a single day. can you discuss your rationale for making the changes to the value at risk models and when those decisions were made? >> the old model have been effective from january 15 of this year. the new model was put in place. on april 13, we have no reason to believe that the model was not better nor did we realize the severity of the problem we already had. shortly after that, we found the at the10q was going to be filed. between the last weeks in april
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and the first part of may, we realize the problem we had and the problem of a model. file be10q on may 10, we made announcements to prove perjury to change the prior directive that would put the old model back because we said was more accurate than the new model. we made that disclosure to our shareholders.. >> can you explain why the new model failed to protect the magnitude of losses in this case? >> i will have to give you more detail later but all these models back test and the back tested better than the old model is what i believe. it was a statistical test and. the future is not the past with models. things change. concentration, liquidity, people's views about your, credit spreads, high-yield versus investment grade, and the old model was better on some of the things that happened in
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april and may than the new model. >> some of the banking regulators on the basel committee are considering a move it from thevar to an expected shortfall. with this move provide regulators and investors more information about the possible losses that bank of experience? >> i don't know because i don't know how that is calculated. var is one measure and a look at stress tests and default is more about stress testing. management cannot rely on models to run businesses. there are one input. there is a judgment, knowledge, experience, and a general fear you learn to survive for 56 years on how things can go wrong. >> in your testimony, you indicated that one of the reasons the chief investment office started adding positions in the synthetic credit was to
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reduce the risk in anticipation of basel requirements. can you explain why these particular positions would be problematic under basel? >> under bob i, -- under baseli i think the position was under $20 billion, a under basel iii, i think it was $60 billion. >> why didn't the other units at the bank experienced similar issues reducing that risk? >> there were other parts of the company that we looked at with basel iii and ask them to reduce. sometimes it is driven more by the customer than our own decision. >> thank you. >> senator bennett. >> thank you for holding this
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hearing. i am the last. being last as no fun because everybody else has asked the questions. let me try. i appreciate it very much your response to senator call's observations about the difficulties that borrowers are having with responsiveness. i will take you up on your offer on behalf of colorado and say to anybody listening to this hearing, if there would make the same generous offer, i think all this would appreciate it. in your written testimony, you said that while the c.i.o. primary purpose was to invest liabilities, it also maintains smaller synthetic credit portfolios which its intent was to protect large institutions. why did those two functions --
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what are those two functions in the same place? i know you hedge across your lines of business but why is this in the same place? >> it did not have to be but generally that unit consolidated foreign-currency exposure. it was irrational place to put it. -- it was a rational place to put it. there are other parts of the company that hedge credit exposure. >> as somebody who supports the exemptions, the hedging exemption and conscious of the volcker rule which i support, it raised in my mind the question whether having them in separate places -- because the purposes are different, having them in separate places may have a useful value. the second question i had was about the trade.
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you also made the observation that the transaction could have been handled by on a winding, by lessening the degree of exposure. why wouldn't that have been the thing to do? why do think the folks who made this decision made this decision? >> i'm told they thought what they're doing was more cost efficient to reduce the exposure and maintain some of the hedge against tale events. that is what i am told there were thinking at the time. >> y cost-efficient? >> that over time, you would not spend as much time getting rid of the investment 1 when seven other. >> since you are here, this is unrelated to the topic at hand -- i think you are aware of my concern about the fiscal condition of this country.
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can you take the last couple of minutes to talk about how you see a relative position with europe and other places, the political rest of our not accomplishing what we need to do on the fiscal side and the upside of week actually come together in a comprehensive way to address the long-term fiscal condition of the united states? >> your asking one citizens of opinion -- europe has serious issues. there is a good reason for the european union which is complex with 17 nations. the united states has a serious issue. you never fix a problem unless you and knowledge you have one. we have several. the fiscal cliff may not wait until december 31. markets may take action before that which would slow down the
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economy. i would not personally be of the mind that it is ok to wait until after the election. i think it would be better to do something now so we don't create additional uncertainty among businesses and consumers. we have to get our fiscal act in order. it will either be done to us or we do ourselves. there's a road map i like called simpson-bowles. if we had done something like that, you would reduce uncertainty about taxes, increased confidence in america, you would have shown a real fix of a long-term fiscal problem. i think you would of had a more efficient tax system and a more effective tax system that is conducive to economic growth. i would urge everyone to support getting something like that done. unfortunately, the specifics are not as important as getting
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something like that done. we missed an opportunity to do it and i think it helped cause a downturn last year. >> sh enteredelby has a brief observation -- >> do you know of any bank that has been well-capitalized, well-regulated, and well-managed that has failed? >> i do not, sir. >> we have closed about 500 banks and the last three or four years. just about everyone of those banks failed because they were inadequately capitalized of a bad loans, said tuesday. -- so to speak. would you agree there is no substitute for good capital? >> thereubstitute for capital, that is correct. >> thank you. >> thanks di mr.mon for your testimony in being here today.
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good's hearing is a reminder that we cannot let down our guard and a must remain vigilant so that we continue to have a strong and stable financial system. before we adjourn, what to provide committee members a brief update. ranking member shelby and i are continuing to discuss a way forward on legislation we have worked together in the past markups to keep a certain bill. i hope my colleagues will agree to keep at it. this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]
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>> j.p. morgan chase president and ceo jamie dimon will return to capitol hill next week to testify before the house financial services committee. we will have live coverage on cspan 3 tuesday morning at 10:00 a.m. eastern. today on c-span, "washington journal" next. the senate finance committee will talk about how medicare pays doctors and health-care providers and later, live coverage of the faith and freedom of conference.


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